U.S. home market approaches a peak as buyers stretch

The U.S. housing market may be nearing a peak, according to economists and real estate agents who say too many buyers are having to stretch too far to pay inflated home prices.

Buyers are "taking interest-only loans and other exotic loans in a desperate attempt to afford the house, and that's a sign the market is nearing the top," said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York.

Housing affordability is at a 14-year low, according to an Aug. 3 report by the National Association of Realtors, which said that home sales are "close to a peak" and prices will rise next year at about half the rate of 2005.

Real estate brokers in some markets say houses are staying on the market longer and the number of unsold homes is increasing. Recent figures showed the number of homes on the market were at a 17-month high.

Sales of previously owned and new homes, which set records in June, dipped in July for only the second time this year.

Sales of existing homes were at an annual rate of 7.16 million in July, down from June's 7.35 million. The month still showed the third-strongest sales pace on record.

"Realtors have been reporting longer selling times in many major markets across the country for several months, and now they are reporting significant increases in the inventory of houses for sale," said Douglas Lee, president of Economics From Washington, a Potomac, Md., consulting firm. "This is an early sign that the housing market is beginning to cool."

A report from National City Corp. in Cleveland found that 31 percent of local housing markets are "extremely overvalued" in relation to household income, interest rates and population density.

That "presents a high risk of price correction," said National City's chief economist, Richard DeKaser. "As recently as the first quarter of last year, it was only 2 percent, 3 percent of the total housing market in this red zone."

Mark D'Agostino, a real estate agent at E.J. Lelie Agency in Lambertville, New Jersey, said home sellers may have to be more realistic about the prices they can expect.

"People may have gotten a little too aggressive in trying to take advantage of prices, and a lot of sellers jumped in to sell their homes," D'Agostino said. "Now we're seeing a lot more houses on the market, and people reducing prices before the market dies down."

U.S. home prices surged 13.6 percent in the second quarter, the fastest pace in more than a quarter of a century, with the median price of an existing single-family home rising to $208,500 from $183,500 a year earlier, the National Association of Realtors said.

Earlier this month, the Federal Reserve released figures showing buyers increasingly are resorting to riskier financing to afford houses.

Adjustable-rate mortgages, interest-only loans and other "non-traditional" options made up a larger share of portfolios at more than half the U.S. banks responding to a Federal Reserve survey, the central bank said in a quarterly report Aug. 15.

Twelve percent of those surveyed said the share of such loans was "substantially" higher in the last 12 months than in the previous year.

In one of these new mortgages, called an option ARM, borrowers have a variety of payment choices including paying less than monthly interest charges. That means the loans grow larger over time.

Option ARMs last quarter made up 21 percent of the mortgages issued by Countrywide Financial Corp., the nation's biggest home loan lender, up from 3 percent a year ago.